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3 stock funds to reduce risk as fiscal cliff looms

BOSTON (AP) — Investors are anxious. The Dow Jones industrial average had its steepest two-day sell-off of the year on Wednesday and Thursday. With the election behind, the so-called "fiscal cliff" came into focus.

It's such a pressing concern that it's worthwhile to consider the "what-ifs." Are you comfortable with possible losses if Congress and President Barack Obama fail to agree on deficit reduction by the end of the year?

If you're not, it could be an opportune time to assess your portfolio and consider whether to modestly reduce your risk level, at least until a resolution is in sight. One option: Consider stock funds that succeeded in limiting losses when the market fell sharply in recent years, while also performing well over the long haul.

The fragile economic recovery could be derailed — along with financial markets — if leaders can't forge some sort of agreement or interim step by Jan. 1 to better align revenue with spending. New Year's Eve could turn somber as Americans ponder an end to Bush-era tax cuts that would expire in the morning. What's more, automatic spending reductions would affect everything from domestic programs to the Pentagon's budget.

Fresh off Tuesday's election, Obama and Republican House Speaker John Boehner were conciliatory. Each pledged to work toward a bipartisan compromise. Yet the failure of past efforts — including last year's deficit-reduction supercommittee — doesn't inspire confidence.

If some measure of progress is made, there will be plenty of back-and-forth, increasing the risk that stocks will make sharp movements up and down.

"There seems to be a fairly good chance that it won't go very smoothly, and things won't get resolved until the last minute," says Hal Ratner, an investment researcher with Morningstar Inc.

Indeed, volatility is already here. The Dow dropped 313 points on Wednesday, then another 121 on Thursday. A key reason: Investors fretted about the deficit negotiations because the election results could keep in place the same congressional leaders and president who had so much trouble coming together before.

There's little reason for younger investors to worry, as they should have plenty of time to make up for any losses. There's greater cause for concern if you're expecting to retire in a few years, or you're already there and relying on your invested savings.

In either case, you're likely to want to stay invested in stocks to some degree because they offer greater earnings potential than bonds or cash investments. But be aware that you can do so while minimizing risks.

Below are three stock mutual funds that have limited investors' losses in past downturns, and could again prove their worth whether markets become more volatile or not.

Each invests primarily in large U.S. companies, the types of stocks that typically anchor a well-diversified portfolio. They're categorized as blend funds, investing in a mix of low-priced value stocks along with growth stocks offering greater potential for long-term appreciation. The funds have 5-star records from Morningstar because of strong past performance. Morningstar analysts currently give each a top-rung gold medal rating, based on their assessments of each fund's future prospects.